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Fed Chair Powell ‘firmly and resolutely’ conveyed inflation priority: IMF official

IMF Deputy Managing Director Gita Gopinath joins Yahoo Finance Live to discuss Fed Chair Powell's Jackson Hole speech, the outlook for global economic growth, and market risks in China and emerging markets.

Video Transcript

DAVE BRIGGS: Stocks plummeting, the Dow dropping 1,000 points and the tech-heavy NASDAQ shedding almost 4% after Fed Chair Jerome Powell assured rates will stay higher for longer this morning at the Fed summit in Jackson Hole, Wyoming. Brian Cheung is there with a special guest with comments on the macro environment and the Fed chair. Hey, Brian.

BRIAN CHEUNG: Hey, Dave, thanks so much. Well, a lot of happenings here at the Federal Reserve's Jackson Hole Economic Symposium. And I'm here with International Monetary Fund first deputy managing director, Gita Gopinath. Thanks so much for joining us.

GITA GOPINATH: Hi, great pleasure to join you.

BRIAN CHEUNG: So let's talk a little bit about all the happenings this morning. A lot of focus on Federal Reserve Chairman Jay Powell's speech this morning. It was short. It was to the point. What were the big takeaways for you from that speech?

GITA GOPINATH: Well, I think the point he very firmly and resolutely conveyed was that the priority is to bring inflation down. And that requires staying the course. And it will take time, and that he sees rates as being close to 4% through 2023. And it's important not to prematurely loosen policy. So I think he was very clear that this is the number one priority. There will likely be pain-- some pain for the economy. But we absolutely need to bring inflation down to make sure that we are on a good economic growth trajectory for the medium and long-term.

BRIAN CHEUNG: You know, what's really interesting is that it's not just the United States that's experiencing high inflation. And there are a lot of people in the room with you from the ECB, the Bank of Canada, the Bank of Japan, the Swiss National Bank. What's the significance of all these global central bankers being a part of this conversation as well?

GITA GOPINATH: Most of these central bankers share the view that the priority was to get back to price stability. And they needed to take strong action to make sure that happens. And we look at the data, and we have about 85 central banks that have been raising rates multiple times over the past year. So we are in a global monetary policy tightening cycle. But everybody recognizes that the cost of not getting the job done will be quite high. And so it's important to bring inflation down.

BRIAN CHEUNG: At the same time, a lot of that comes over the overarching concern that the tightening will lead a lot of these areas to go into a recession as well. How do you assess kind of just the global picture? We saw multiple downgrades in the last few World Economic outlooks in terms of what it looks like, but China, the eurozone, the UK, all experiencing pretty sharp downgrades and expected economic growth. How do you kind of view all of that?

GITA GOPINATH: Growth is slowing in many more countries around the world with every month that we go into this year. The three major economies, the US, the euro area, China, growth is stalling. And we still have additional shocks showing up, including gas prices that just recently shot up in the euro area, which has a detrimental effect on growth.

So we're not out of the woods here in China besides the COVID problem and frequent shutdowns because of the zero-COVID policy, but also because of the real estate sector crisis. You know, that is weighing on growth. And so in fact, we have for China growth this year to be 3.3%. This is our July forecast, which is quite low by standards of China, China's growth.

BRIAN CHEUNG: Let's talk a little bit more about China because they've been cutting interest rates. It's essentially the opposite of what every other central bank is doing. What is the concern about what's happening in the second largest economy in the world?

GITA GOPINATH: So in the case of China, I think there are two big issues that they're grappling with, which is, one, that private sector demand has not come back. We've been looking for a stronger recovery. And that is yet to happen. That is a reflection of the fact also that cities have been put into lockdowns because of the more transmissible variants of COVID and to prevent more people getting infected and the zero-COVID policy that they have.

The second issue that they're grappling with is the property sector, where we have seen major property developers get into great difficulty. We are yet to see a turnaround in that sector. And that is important. It's very important to make sure that there is no systemic spillover from the property sector to the rest of China's economy. So these are the challenges they're dealing with, and interest rate cuts is one, but that's not going to be enough.

BRIAN CHEUNG: Let's kind of broaden out from the big major players, the large economies, and talk about some of the developing emerging countries. They're in an environment where a lot of these other global advanced central banks are hiking rates. Do you worry about any sort of blowout happening, maybe like a 1997 Asian financial crisis, 1994 Mexican peso blowout with a strong US dollar because of that interest rate differential?

GITA GOPINATH: We are at a different point relative to the period that you mentioned. Emerging markets around the world have learned lessons from the past. Many of them have moved away from borrowing in dollar terms to borrowing more in their own currencies. They have built up reserves. They have much more credible monetary policy.

So, right now, we are concerned about frontier markets that are getting into debt distress, low income countries that are getting into debt distress. We have about 20 emerging markets whose debt is trading at distressed levels. But this is not about systemically large emerging markets. That's not what we're seeing at this point.

BRIAN CHEUNG: At the same time, though, that doesn't mean that there isn't widening inequality. I'm wondering when we talk about the UN World Food Program, for example, talking about how rising prices for food are impacting the more disparate countries, what do you see as the widening gap between what's happening in the advanced economies and the emerging countries, even if there is no massive financial blowout, like you just discussed?

GITA GOPINATH: The rising food prices is a problem almost everywhere in the world, but given that food is a big part of the consumption basket of poorer nations, it is a very serious problem for them. It also could lead to social unrest. And so this is an issue that we are paying very close attention to, along with all the other multilateral agencies, the UN, the World Bank, the WTO, and many others.

So we need-- these countries will need help. Some of them will need debt relief to deal with these increase in food prices. Providing grants will be helpful. And it's also very important for countries not to put export restrictions on food. Thankfully, we've seen some of those restrictions come off in recent days.

BRIAN CHEUNG: And last question, as the hawks around us, apparently, are crowing, but pain was the word that Fed Chairman Jay Powell used today. This is something I imagine a lot of other countries are experiencing as well. What is the thing that keeps you up at night that you worry about from the IMF's vantage point?

GITA GOPINATH: Well, we are at a time when monetary policy is tightening around the globe. And that, by design, will slow down growth, will have an effect on financial markets. And we have many countries around the world who have still not recovered from the pandemic and are facing a food crisis and energy crisis. So these are very difficult times. And 2022 is hard, but 2023 could be even harder.

BRIAN CHEUNG: All right, first deputy managing director of the IMF, Gita Gopinath, joining us here in person in Jackson Hole. Thank you so much for taking the time. Appreciate it.

GITA GOPINATH: Thank you. Thank you, Brian.

BRIAN CHEUNG: All right, we'll send it back to you in New York.